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Discovery Driven Strategy:&nbsp; Predicting the Path for a Toy Shop

Many of you know that I’ve been following the progress of G. Willikers, a toy shop that opened in Sacramento, CA, in the summer of 2006. I got interested in their story initially by an inquiring reporter for the Sacramento Bee who wanted to know what I, as an entrepreneurship professor, thought about the startup. The concept was that the 3,100 foot store would be a ‘do touch’ zone where all the toys would be out and unboxed for the children to play with them. When someone wanted to purchase a toy, runners would get a fresh, new one from inventory. The atmosphere of the shop itself was to be special – a huge mountain with train tracks would be in the center of the store, and the whole experience was to be highly differentiated.

The photo is of Troy Carlson, the founder of the shop, as it was getting set up. The store was also to benefit from a nearby railroad museum which draws fans from all over the world. Oh, and no electronic games or wii’s or anything like that—the stock was to be playful toys like the ones we remember from growing up. Click here for the original story from the Sacramento Bee.

The original prediction

Here’s what I wrote to the reporter at the time, in an email dated May 12, 2006:

I don’t like to depress entrepreneurs, but the whole retail story for toys is not all that positive.

According to Hoovers.com:
“While retail toy sales have been dropping for several years, sales of children’s electronics, a fairly new category, rose 40% in 2004 to $694 million, according to the market research firm NPD Group.”

Mass-market and discount stores accounted for 54% of all retail toy sales in 2005, according to data from NPD Group, a market-research firm.

Traditional toy stores represented just 20% of the market. Indeed, Wal-Mart long ago overtook Toys ‘‘R’’ Us as the #1 seller of toys in the US.

In another blow to specialty toy sellers, Target has launched “Time to Play!” toy boutiques inside the toy departments of each of its discount stores and appears poised to unseat Toys ‘‘R’’ Us as the #2 US toy seller.

In the last 5 years, Toys R Us, KB Toys and FAO Schwartz have all gone out of business.

Creating a Discovery Driven Plan

I would tackle getting a handle on his chances for success by doing a very simple “discovery driven plan” for this business to get a reality check. The technique was originally featured in a 1995 Harvard Business Review article that I co-authored, and is the primary tool in a new book we are working on.

Here is how I would do it.

What would make the business worthwhile?

Let’s say our entrepreneur desires to generate $250,000 profit before taxes when the business is mature to make this whole thing worthwhile. Let’s say that his return on sales (money left after he’s paid for inventory, salary, leasing costs and other expenses) is about 50%. That says he needs to be able to generate revenue of $500,000 per year from the business when it is fully developed.

If I make an assumption that the average ticket price of an item in his store is $25, that means he’ll need to sell 20,000 of them to get his $500,000 in revenue. If the average number of items a typical buyer picks up when they visit the store is 2, that means he’ll need 10,000 “buys” to generate his revenue. If I make a further assumption, that the bulk of purchases will occur in the 8 weeks before Christmas / holiday season, that means he’ll need to get 1,250 “buys” during each of those weeks. Now obviously not everybody who visits his store is going to be a buyer. So if we assume that he needs to generate 5 visits for every buy, that means he needs to get 6,250 people into his store every week during those critical 8 weeks of the holidays, or nearly 900 people every day, assuming he’s open 7 days a week during that time.

Even if he drops his profit aspirations to $100,000, he’s still going to need to get 400 people into the store per day to hit the numbers, based on these assumptions. Even if the average price is $50/item, he’s still going to need 200 people… you get the idea.

Market and competitive benchmarking

Another interesting point is that if you look at the population statistics, there are just under 62,000 kids under the age of 9 reported to live in the Sacramento area (see Sacramento Statistics). So the equivalent of one out of 3 Sacramento kids are going to need to get something from his store every year if he needs to sell 20,000 items a year.

As to the museum connection, I think it’s a double edged sword. If people are spending time looking at exhibits and wandering around the museum, that’s time they don’t have to experience the toy store. I’d want to test the assumption that there will still be an appetite for toy experiences once they’ve done the museum thing. Remember – you’re competing for disposable time here, and that’s the one thing most prospective customers will be chronically short of.

Now obviously, this is a vast oversimplification.

Operational Assumptions

I will still argue, however, that logically, the scale of the challenge supports my somewhat pessimistic view of his chances. Even under rosier assumptions – let’s say an average buy of 5 items, and needing only 3 visitors to get a buyer, he STILL has to get over 200 people into the store to make a $250,000 profit number. He could use this spreadsheet himself – just put in whatever assumptions he prefers. You’re going to have to tweak a lot of numbers to get it to come out looking like a great way to spend some years of your life.

Of course, maybe this is more of a hobby for him than a business he needs to live on, in which case the numbers for required profits could come way down and the case looks more feasible.

My prediction, based on the discovery driven plan analysis

My prediction? Assuming this is a genuine business and not a hobby—He’s going to open with great enthusiasm and verve, and develop a loyal following among train aficionados, young mothers, the retro-nostalgia crowd and people who want to hang out in a cool place (with the toys they remember from childhood). He’s going to be working very long hard hours. He’s going to have cash flow problems around the holidays, because he’ll have to stock up on inventory for those critical 8 weeks, and that will consume huge amounts of working capital. Eventually, he’ll try to figure out how to make money from more ‘experiential’ kinds of things (for instance, the way the Build a Bear workshops do or adding a Starbucks like consumption component). Unless he can create a powerful draw, he’s going to start to question whether this is all worth it.

Unsolicited advice

If I were to give him some advice, it would be to treat the retail store as a place to experiment with different toy concepts, and try to build an Internet-based business distributing these unique toys. I just think it’s going to be a very hard row to hoe without electronics, ‘adult’ appeal and truly unique items (such as FAO’s $600 stuffed giraffes).

By the way, if he is interested in being interviewed periodically as the business gets going, I would love a small business case study for my new book.

And I would also love to be proven wrong – the store sounds like a neat idea. I am simply concerned that this may be one of those entrepreneurial “triumph of enthusiasm over reality” situations.

What happened since then? UPDATE!

I’ve been monitoring G. Willikers’ progress periodically since then (and no, I never did get my interview). I first started to have some misgivings when repeated phone calls to their number transferred me to Carlsen’s other business, Stage Nine entertainment. And just yesterday, when I tried to visit their web site, I found that the site had not been renewed as of March 18, 2008.

So I was concerned, and reached out to Jon Ortiz, the reporter who had originally contacted me about the shop. Much to my relief, here’s what he said:

Rita:

All is well with GW. The store is still open. YOY sales up 30 percent last month. Looks like the Web site situation was a slip up that is being corrected.

So isn’t that nice? I’m glad. So maybe I’ll go for that interview after all!